The Myth of 50-50 chance of a trade to win

I have heard even seasoned traders saying this: "(a)Hey, no one can predict price moves, (b) it's 50-50 chance of winning & losing".

I agree with part (a) but part (b) is not true and it's worse than 50-50, chances of failure is above 60-90% in any given trade for a naive trader!

here is the reason.

Every trade has atleast 5 bare minimum attributes:
1. entry location
2. exit location
3. leverage used
4. Risked amount or SL distance
5. Time duration of holding.

Dabbling with above 5 variables will result in myriad of unique strategies.
Market at any given time will benefit only one group of strategies and all other will miserable fail. For eg: in trending market all counter trend scalpers and range traders are screwed and vice versa.

So let the number of possible strategy group be 3-5 I.e trending up, trending down, choppy whipsaw, ranging market. Market rewards only one strategy group at any given time and punishes all other strategy group...

So if you are blindly picking 1 out 3 what are your odds of picking right strategy by blind chance: it's 1/3.

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This is just a bare minimum argument, in real trading world it's not just 5 variables per trade, there are dozens of variables (eg: Type of instrument you can't trade options as futures, risk structure of trades i.e scaling in or all in all out trader?, season of the trade eg: option expiry or start of month? and finally blackswans).

What are the odds of consistently picking right strategy group? if its 50-50 per trade, trading will be 100 times easier! It's way worse than 50-50... for naive trader it's about 90% loss chance-10% win...A naive trader may feel he is smart esp. when markets are strongly trending but when he sits down to trade as day trader suddenly his chances of screwing up his own account grows to 95+% over time(say 3 months)!

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The idea of 50-50 comes from coin tossing experiments which have only two outcomes.
Equating trading to coin toss is simplistic and wrong, may be to demonstrate simple concepts it will help but reality of trading is way richer than this simple coin tossing model. Trading is an open dynamic system which can't be computed where as all academic probability models assume it as closed static lab experiment.

Just so, that the concepts are clear......

The flip of a coin can have only two outcomes, 'head or tail'. Based upon the tenet of mathematical probability, With no extraneous factors coming into play, the chances of encountering either outcome is computed to be as 50/50 over a valid data sample (i.e of a meaningful/ statistically substantial duration) of coin flips

In the same manner, the end result/ final outcome of a trade can also be simply categorized as either a win or a loss and With no extraneous factors coming into play, the probabilistic outcome is deemed to be 50/50 as above for a, similarly defined, valid data sample

As an aside, since this thread coincidentally happens to be in the 'Risk & Money Management' subsection, would like to point out that the application of position sizing and money management parameters, even with these deemed measures of probabilistic outcome, would still result in an overall win by keeping the losses smaller when one loses and the wins bigger when one wins!!!

Moving on to the discussion of the prime tenet....... When one talks of entry location, exit location, leverage (in addition, strategy) etc etc, then one is bringing about extraneous factors into play. These factors are introduced with the intent of putting the odds in the favour of a win (Am presuming that nobody would deliberately desire to increase the odds for a loss thereby influencing the probabilistic outcome. This is akin to tampering with the coin flip in a manner to make it achieve the desired/ favoured outcome

While its kind of a norm nowadays to interchangeably bandy about trading semantics, TBH factors like entry, exit, scaling etc are part of TACTICS. The tactics themselves flow from the STRATEGY. The strategy is dependent upon the market state/ structure (whether trend OR congestion). And (Important Caveat) the market state has its basis in the trade timeframe of use and the trade event horizon. Factors such as leverage, risked amount etc are part of risk/ money management and, as such, do not influence the outcome of the trade (win/ loss) but the capital appreciation/ depreciation

The success/ failure of these factors in influencing the outcome of a trade has less to do with mathematically derived statistical probability and more to do with a trader's understanding and application of the basic concepts and principles of the trading process

Regards,

P.S - In a lighter vein, the term 'blackswan' was coined to cater for the times that the coin, instead of returning a head or a tail during a coin flip, chose to stand on its edge

Hii there..i am newbee to trading and would tend to agree with you with my little exposure to market..that its not 50 -50 for a naive trader...indeed the odds are against him..

But on the other hand if you ask a senior Pro..they would say that its near 50-50..even though they would still say its still not a favourable outcome after years of exp.

So if we do an experiment and let a computer trade instead of a human..what do you think will be the probability of Win /Loss...i assume you would agree that it would come out to be near 50-50..though may not be exactly the same...due to slippage issues..

So as i think..something in human nature is preventing it from coming close...i think its fear/greed....we as a new traders (me included)...just do the opposite...let the loss run and book the smallest profit....

We get into good positions and turn profits into loss...but i reckon even if we would have taken an opposite position , the result would have been the same..this boils down to only one thing..our psychology with profits/loss..

these are just views from a newbee here...

Very well written sir.!

Even i agree with you , being a beginner the strike rate/success ratio is very less. It will take time to win the emotions and follow rule based trading.